Oda Russian Commercial Law 2007-1

These principles are better understood when contrasted with the system under socialism, where the state played a predominant role in the economy.

The equality principle primarily means that entities participating in civil circulation shall be treated in an equal manner regardless of their form of ownership, i.e. whether they are owned by the state, municipality or by private capital. The USSR Law on Ownership of 1990 provided, for the rst time since the October Revolution, that ownership rights of the state, local entities, state enterprises, private enterprises and individuals should be protected equally. The present Constitution guarantees that private, state, municipal and other forms of ownership are recognised and protected in an equal manner (Art.8, para.2). This was certainly not the case under socialism; interest of the state always had precedence over the rights of individuals. It should be added that in contrast with the 1964 Civil Code, individuals are now allowed to be involved in entrepreneurial activities. These people, and their association in the form of commercial organisations, must be treated equally with state and municipal enterprises in civil law relations.

Inviolability of property is also a constitutional principle. The Constitution provides as follows (Art.35, para.3):

No person shall be deprived of his property except by a judgment of the court. Compulsory alienation of property for the needs of the state shall be carried out only with prior and equivalent compensation.

This rule is also incorporated in the Law on Foreign Investment in the following way (Art.8, para.1):

Property of foreign investors or commercial organisations with foreign investment is not subject to compulsory withdrawal, including nationalisation, or requisition, except in cases and on the grounds established by a Federal law or an international treaty.

The Civil Code has a provision to the effect that requisition of property for the interests of society should be allowed by the decision of a state agency in cases of epidemics, natural disasters and other circumstances of emergency based upon the manner and terms provided by law, with payment (Art.242, para.1).

The uninhibited exercise of civil law rights, again, is a constitutional right (Art.34). The relevant provision of the Civil Code states the following (Art.1, para.2):

Individuals (physical persons) and juridical persons shall obtain and exercise their civil law rights by their will and in their own interest. They shall be free in establishing their rights and duties on the basis of a contract and to determine any terms of the contract which are not against the law.

The bene ciary argued that if the guarantor becomes aware that the basic obligation has been fully or partly performed, he is under an obligation to notify the bene ciary without delay. The bank argued that the bene ciary deceived the bank in that the latter failed to inform the bank that the claim of the foreign party to the contract had actually been performed by the sale of the pledged collateral. The bank claimed that this was an abuse of right on the part of the bene ciary.

The court acknowledged that the bene ciary had actually had the claim satis-ed from the sale of collaterals abroad, and therefore, there was no ground for claim on the part of the bene ciary. The court found the claim to be an abuse of rights as provided by Article 10 of the Civil Code.32

In such cases, the court and the arbitration tribunal may refuse protection of civil law rights.

It should be noted that restrictions on civil law rights can only be effected by Federal law (see also Constitution, Art.55, para.3). This means that these rights cannot be restricted by a presidential decree or edict of the cabinet.

The above provision refers to competition law. The Competition Law was enacted as early as 1991. It can hardly be said that this law has been functioning in the way it had been envisaged. The majority of cases handled by the competition agency involve complaints by individuals against public utilities. The 1991 Law was replaced by a new law – the Law on the Protection of Competition in July 2006.33

The Civil Code lists various means of protecting civil law rights and restoring infringed rights by the court (Art.12). These include:

i) recognition of rights;

ii) restoration of the status quo ante and termination of acts which infringe the right or create threat of infringement;

iii) recognition of contested acts as void;

iv) recognition of acts of the state and municipal agencies as void; v) self defence of rights;

vi) compulsory performance of obligation in kind; vii) compensation for damage;

viii) imposition of penalty for delay; ix) compensation for moral damage;

x) termination or alteration of legal relations;

32Item 3, Information Letter of the Plenum of the Supreme Commercial Court, February 16, 1998, in Spory pri ispolneniii denezhnykh obiazatel’stv i osushchestvlenii raschetov; sbornik dokumentov, Moscow 2000, pp.60-61.

33Law No.135 FZ of July 26, 2006.

The Law on Non-Commercial Organisations was enacted in 1996.36 This Law provides for the legal status of non-commercial organisations as well as the procedure of establishment, operation, reorganisation and liquidation of such organisations and the means of support by the government. Non-commercial organisations are de ned by law as organisations whose basic purpose is not the pursuit of pro t and whose received pro t is not distributed among the members.

Unlike the German Civil Code which has two categories of juridical persons, associations (Verein) and foundations (Stiftung), the Russian Code has an equivalent of foundations, but associations are not provided as such, and instead, subdivided into various types or organisations.

The original intention of the legislature seems to have been that fonds correspond to foundations (Stiftung) in other jurisdictions. Fonds, for the purpose of the Civil Code, are non-commercial organisations without members and are set up by individuals and/or juridical persons on the basis of proprietary contributions for social, charity, cultural, educational and other socially useful purposes (Art.118, para.1). However, in practice, “with the absence of a strict division between commercial and non-commercial organisations, many fonds are actively involved in entrepreneurial activities which this juridical construction had not envisaged”.37

Of the above sub-categories of juridical persons, institutions (uchrezhdenie) are probably the most dif cult to understand for lawyers outside Russia. They are organisations which are founded by the owner in order to perform administrative, social-cultural, or other non-commercial functions and are nanced entirely or partly by the owner (Art.120, para.1). The owners can be either the state, municipality, juridical or physical persons, but the “predominant category of them is governmental”.38 One commentator pointed out that these are “remnants of the previous economic system” and are mostly government or municipal agencies.39 State and municipal organisations which provide service, such as schools, museums, and hospitals are examples.40 Institutions do not have the title over the assets allocated to them; the title remains with the owner/founder. On the other hand, the owner/founder bears supplementary liability for the debts of the institution (Art.120, para.2).

Production cooperatives are associations of individuals who are not entrepreneurs, established for the purpose of production or other commercial

36Law No.7-FZ of January 12, 1996.

37Braginskii ed., Kommentarii chasti pervoi grazhdanskogo kodeksa...., supra, p.149.

38O.N.Sadikov., Kommentarii k grazhdanskomu kodeksu Rossiskoi Federatsii, chasti pervoi,rst edition, Moscow 1997, p.161.

39Braginskii ed., Nauchno-prakticheskii komenntarii..., supra, pp.212-213.

40Sadikov, Komentariii..., third edition, p.337. L.L.Lopov ed., Administrativnoe pravo, Moscow 2002, p.129.

purposes. Members contribute their labour and/or assets. They bear supplementary liability for the debt of the cooperative (Art.107, paras. 1 and 2). This form of organisation has long been known in Russia as artel’. It was revived in 1988 as a vehicle of private investment hitherto unknown under socialism, dropped in the 1990 Law on Enterprises and Entrepreneurial Activities of the USSR, but restored in the Civil Code.

Enterprises which are directly owned by the Russian Federation or its constituent entities are called unitary enterprises. They have juridical personality separate from the state or the constituent entities of the Russian Federation.

The Law on State and Municipal Unitary Enterprises was enacted in 2002.41 Unitary enterprise is de ned as a commercial organisation which does not have ownership over the assets allocated to it by the owner, i.e. the state or municipality. The word “unitary” is said to be re ected in the following characteristics of unitary enterprises:42

i) unitary enterprises can be set up only on the basis of state or municipal property;

ii) unitary enterprises may have only one founder;

iii) property of unitary enterprises is indivisible and cannot be distributed as shares or quotas;

iv) the owner of the property of the unitary enterprise which it founded maintains ownership over the property and the enterprise itself has only limited real rights;

v) only the owner of the unitary enterprise determines the strategy of economic development of the enterprise, gives consent to the most important activities, and controls the use and maintenance of its property;

vi) the current activities of the unitary enterprise are led by a single executive body appointed by the owner.

There are two types of unitary enterprise: one is a unitary enterprise based upon the right of economic management and the other on the right of operational administration.

Unitary enterprises based upon the right of economic management (khoziaistvennoe vedenie) are not entitled to sell, lease, pledge, contribute or otherwise dispose of the immovables which had been allocated to them without the consent of the owner/founder (the state or municipality). Other assets can be disposed of unless prohibited by law or other legal acts (arts.114 and 295).

41Law No.161-FZ of November 14, 2002.

42M.Iu.Tikhomirov ed., Kommentarii k federal’nomu zakonu o gosudarstvennykh i munitsipal’nykh unitarnykh predpriiatiiakh, Moscow 2004, pp.17-18.

Unitary enterprises based upon the right of operational administration (operativnoe upravlenie) are called treasury enterprises (kazennoe predpriiatie). They have the right to possess, use and dispose of the assets allocated to them only within the scope of law in accordance with the purpose of their activities, instructions by the owner, and the purpose of the property (Art.296, para.1). Furthermore, there is no capital set up for unitary enterprises based upon the right of operative administration. However, these enterprises [still] cannot dispose of assets without the consent of the owner in contrast to the enterprises based upon economic management (Art.297, para.1). In this sense, the right of operative administration is regarded to be narrower in scope than the right of economic management.43 Both types of enterprises are not entitled to borrow money or guarantee a debt etc. without the consent of the owner (Art.18, para.4 of the Law). The number of unitary enterprises based upon the right of operative administration is relatively small. They are limited to state enterprises in the defence industry and enterprises attached to penitentiary institutions.44

In unitary enterprises based upon the right of economic management, the owner is not liable for the debt of the enterprise, except in cases where its bankruptcy was caused by the owner (Art.114, para.7). In contrast, the state bears supplementary liability for the debts of unitary enterprises upon the right of operative administration (Art.115, para.5). The difference comes from the fact that the scope of power of the latter is narrower, more speci cally, there is no capital set for such enterprises, therefore, there is a necessity to protect third parties who entered into a transaction with them.45

(2)Civil Law Capacity of Juridical Persons

The Civil Code provides that juridical persons may have civil law rights in accordance with the purposes provided in their founding documents and are liable in relation to these activities (Art.49, para.1).

The 1964 Civil Code had adopted a rather strict approach to ultra vires. Under socialism, state enterprises were kept under strict supervision of the state. There was a case where a cooperative whose registered purpose was to “satisfy the needs of citizens” sold computers to various organisations. The court found the sale to be void as ultra vires.46

43Ibid., p.27.

44Braginskii ed., Nauchno-prakticheskii komenntarii..., supra, p.204.

45Braginskii ed., Kommentarii chasti pervoi grazhdanskogo kodeksa...., supra, p.145.

46Ibid., pp.78-79.

The present Code still provides that juristic acts effected by juridical persons against their purposes can be voided (Art.173, para.1). The construction of the provision is different from the socialist period in that 1) only the juridical person itself, its founders, or state agencies which supervise the juridical person is entitled to bring an action, and that 2) the act can be found void only if the opposite party had known or could have known that the act was ultra vires. On the other hand, insofar as commercial organisations are concerned, the doctrine of ultra vires does not apply. This is in line with the development in most other countries. It is not mandatory for commercial organisations to register their speci c purposes of activities. In fact, the Civil Code provides that commercial organisations, except for unitary enterprises, may have civil law rights and assume obligations necessary for performing all kinds of activities not prohibited by law (Art.49, para.1). As mentioned above, unitary enterprises are different and are subject to this doctrine. Unitary enterprises, in contrast with companies, have only limited civil law capacity, instead of general capacity. The Articles of Incorporation of unitary enterprises must contain information on the object and purposes of the activities of the enterprise (Art.113, para.1).47 Juristic acts in excess of such capacity are null and void (Art.168).48

Certain categories of businesses, e.g. exploration and development of sub-soil as well as banking and insurance, require a special license. The list of activities subject to license is provided by the Law on Licensing of Speci c Activities.49

Juridical persons acquire legal capacity by registration. Juridical persons are subject to state registration (Art.51). There is a uni ed state registry of juridical persons and individual entrepreneurs which is administered by the Ministry of Tax and Levies. The Law on the State Registration of Juridical Persons and Individual Entrepreneurs was enacted in 2001.50

The Civil Code also contains provisions regarding the managing bodies, the names and locations, liability, reorganisation (merger, split, conversion etc.), liquidation and bankruptcy of juridical persons [see Chapter 4, Company Law].

3)The State as a Participant of Civil Law Relations

The Russian Federation, constituent entities of the Russian Federation (constituent republics, regions, provinces, cities of federal designation, autonomous

47See also Article 9, para.3 of the Law on State and Municipal Unitary Enterprises.

48Tikhomirov, supra, p.125.

49Law No.178-FZ of November 26, 1998.

50Law No.129-FZ of August 8, 2001.